Oftentimes, comparisons are made between trading and gambling — the variance, the risk/bankroll management, the lack of complete information. Whether you’d classify trading as a gambling is almost a philosophical question, in my opinion, and one that doesn’t really have a definitive answer. Starting a business is a gamble, too.
In any case, one thing that differentiates them in my mind is the level of regret. As a gambler, it’s rare that you can ever feel like you missed out on some big win if you aren’t playing; maybe some superstitious slots player might claim that someone stole their jackpot if they happened to be watching their favourite one-armed bandit pay out to a stranger, but for the most part it’s impossible to know what could have been. With markets and trading, you have up-to-the-minute information that you got out too early, that you should have stayed in, that you took a small profit instead of a large one. In my opinion, it’s regret that causes a lot of issues with traders — the revenge trade or jumping back in at inopportune times as the steady accumulation that isn’t accruing to you continues like water torture. As they say in poker, that’s one of my leaks. This kind of artificial hindsight is in some ways the bane of anyone who dared look at a chart to use price as a proxy for value, and a cousin to Keno players and those who back-test their theories; if one were, like Warren Buffett, able to price something based on something outside the vacillations of the market, this kind of regret wouldn’t exist.
Still, I’ll take the regret that comes with the small profit over the large loss, any day of the week.
I think to clarify what I was saying in the last entry, which sounded a bit disjointed — I was probably still half-asleep — I find the use of statistics in investing and trading reportage or blogging somewhat useless, especially when I see people discussing their numbers for this year, and I think they have a pseudo-marketing effect that I find disingenuous. There was an article in a Globe and Mail continuing series of investor profiles that highlighed a family achieving 600% returns with “play money” (I think it was under 10K) and another from a woman with 300% returns on her 5K TFSA, a woman who said that she had never invested before in her life but was now the subject of a newspaper profile. There’s rarely any context given — like the somewhat historic investing environment we’re in — or any mention of the fact that perhaps this kind of investing strategy might not easily scale (along with liquidity factors, psychological effects become a major deterrent with larger amounts of capital, something rarely addressed in newspaper investing reportage). It’s this kind of reporting that inculcates a certain kind of mainstream investing culture, along with the other species of article in this series, which is “go to a qualified investment advisor instead of trying to figure out this investing thing yourself”. If that isn’t a mixed set of messages I don’t know what is. But personally, I think instead of just saying “go to a qualified, certified investment advisor”, these kinds of investor education articles should spend a lot more time on developing people’s skepticism and tools and techniques for identifying when a person is truly a good investor rather than a salesman.
Another decade closed out, and overall it’s been a good one as an investor for me — thankfully, I’ve done a little better than the middling return an investment in a North American stock index fund would have given me over the years. Perhaps not necessarily confounding evidence against efficient market theory, but close enough for me. Happy New Year, folks.
Sitting muzzy-eyed over a coffee this morning, I had the thought while reading about a stock that had gone from under a dime “up ten-fold” over the course of 2009, that I don’t really put much stock in “ten-baggers” and big investing home-runs without a corresponding discussion of how much actual money a person would typically have invested in a stock or derivative. In my investing philosophy, I would rather put a larger amount into something that may not be as high-performing, but is ostensibly less risky. I suppose intuitively I’m selecting my level of risk, but it’s something to think about when you see people put a few thousand into a flyer stock — which is more like lottery-style investing — than putting a few hundred thousand into something that might move only a fraction of the amount but comes with a relative margin of safety (in the sense of less volatility). I’m sure those who have properly studied the math around all this are probably scoffing at these kinds of insights, but I guess I’ve always had more of an intrinsic horse sense than any highly quantitative approach.
Harper’s takes a look at those who hang out in Warren Buffett’s reflected glory and doesn’t much like it. (From Felix Salmon, who believes that Berkshire Hathaway will turn completely average after Buffett’s shuffled off this mortal coil. I’m somewhat inclined to agree, and he makes a good point in an earlier blog post about Buffett’s talk of “100-year bets” being a little disingenuous.)
I’ve been reading some mainland Chinese trading and investment blogs, mostly to practice my reading comprehension — I’ve found Google Translate to be of some assistance here, and even given its relatively poor translation, I think you can probably get the gist of this excerpt from a September 2009 blog post by a well-known (in China) stock market blogger known as “Old Sha” which gets translate to “Old Sand”:
The reason is no longer the old sand every day on my blog, in addition to suits the need to protect the eyes, but also feel that China’s stock investors after the great bull market of 2007 has been “launched” up on the previous two years, the old sand almost become a group of investors “well-known” figure, as “the Chinese first Bo”, “2007 Person of the Year”, especially proud of is that in that period, the old sand has not received any investor penny commissions, not to become a “body care, “even chance to book time and again take the initiative to give up!
Now I can do nothing in front of the sweet-scented osmanthus trees enjoy the cool air, because I see China’s urbanization process, an inevitable trend and see the Chinese securities market continues to take the inevitable trend of cattle! Also see the investment sense basically has gained! I am sure that any people who buy stocks now, as long as those who are not buying a very small number of “stinky stocks,” will certainly be millionaire! Buy stocks now, as I bought this building house the same as a decade ago!
Multi-point up from 1600, many stocks have doubled, tripled, and in the current 3000 points up and down, Qi Zhang a long time is unlikely to occur again the scene of fall, and now had to select one or a few long-term holders of stocks Yes, six months or a year to double profits within a goal is entirely possible!
The reference to “trend of cattle” is a mistranslation — it really should say “bullish trend”. I have to say, it’s pretty amazing to read this kind of writing (“will certainly be millionaire!” and “six months” to a “year to double profits”) — it’s bubble talk, and I wonder how hard the Chinese stock market will crash. They’re working hard to introduce various futures and futures options markets in Shanghai and Shenzhen, too. “Old Sha” thinks that China’s 2010 stock market action will parallel the hot 2007 market — methinks the same stimulus issues that are driving the rallies in North America are at play.
A recent article in the New Criterion discusses the contemporary high-end art market. It is interesting how the bubble in the market sort of contemporaneous with the post-war economic growth; it reminds me a lot, too, of the Dutch tulip frenzy, but spread over a longer period of time and justified in a more intellectual, esoteric fashion. I suspect a potentially good trade would be to buy some of the unloved, traditional art that is being sold off by museums to fund purchases of some of this contemporary art and store it in a vault for fifty years. Everything old is new again. (That said, I enjoy a lot of contemporary art — I just don’t think it’s worth a great deal, monetarily. Interestingly, though, in the newest young artists, draughtsmanship and craft is making a comeback, so I don’t think my trade idea is too far-fetched.)
Interesting (American) Thanksgiving week trading, that’s for damn sure. One of those times when a good daytrader can really flex their muscles, although I suspect it’s not the kind of life you’d be able to maintain past a certain age, much like the pit traders (the original daytraders, for the most part) who hadn’t quite made it by the time they hit their 40s. The ones that have seem to have made it big enough to sock some of it away in long-term investments don’t seem to depend on that kind of roller-coaster action for their daily bread anymore, although I imagine the occasional thrill ride keeps them young.
Canadians who read this blog, especially Lower Mainlanders, are probably very familiar with the sudden “re-boom” of real estate in Vancouver and environs — although mostly Vancouver — due to a variety of factors. Reading Australian news, I’m reminded of how similar our Antipodean cousin is to us, with this article really playing up the similarities. Live by commodities, die by commodities, I guess. Whenever a story ends with the statement “The only possible dampener at the top…” I get a bit leery.
A Nicholas Carr article on the changing face of video-watching, as America moves towards streaming video to dumb terminals and more on-demand television watching, reminds me of how Canada’s moving at its own pace in this realm. What with the battle between Canadian broadcasters like CTV and CBC and Canadian network companies like Rogers and Shaw, arguing over carriage fees in the realm of old-school cable television, it feels like we’re really behind the curve here. I mean, in the article, Comcast is thinking of buying NBC Universal. The closest thing we have here is Rogers owning… CHUM Television (CityTV stations etc)? The Canadian Television Fund or whatever it is?
Obviously, we don’t have a real equivalent to Netflix in Canada — there have been attempts, but they’ve done relatively poorly — and very few of our content companies have looked to digital distribution, except maybe CBC, although there isn’t a full supply-chain in existence. So what remains is the ad-hoc version of downloading unofficial content and streaming it via modded Xbox. I mean, has Xbox Live or iTunes really taken off here, for distribution of Canadian television/content? I don’t know. I imagine this will make us even more America-centric; I can’t think of the last mainstream Canadian television show I’ve watched, save for the occasional cursory glance when I’m heading for the local news (one of the few areas that cable/network television still has going for it — I wonder if there will ever be a way to mimic this serendipitous kind of news-watching in a streaming or on-demand format).
This also reminds me a lot of the differences between American telecommunication companies and Canadian ones, in terms of take-up of new technology. Are we running behind in this country? Or will this kind of slow cultural uptake be our saviour in the end? (Much like the difference between American and Canadian banking cultures.)
A veteran energy trader speaks about the issues in the natural gas market. Pretty interesting to me, as there’s been a lot of chatter about natural gas and its lows and this article makes me kind of leery of trying to profit in it.
It’s pretty interesting seeing all these documentaries and books lately on futures exchanges; here’s a sort-of-review of a book by Leo Melamed, the guy who took the Merc from a pit trader’s paradise to the decentralized, electronic market it mostly is today. It’s still fascinating to me how we’ve gone from agricultural trading and hedging production to a collection of virtual markets represented by numbers, paralleling the move from hard assets and paper currencies to banking and accounts that are often just about manipulation of figures.
It fascinates me a little how many people in trading or investing set goals for themselves, often monetary targets that are aimed for on a specific timeline. It’s mostly because this is so at odds with my own view of trading and the markets; at least on a broader scale, I don’t have any specific number in mind when I trade, and have found the more that I do look to specific numbers, the worse my results tend to be. I think it was in Market Wizards that someone told an anecdote about how one trader was aiming to buy a fur coat for his wife with the profits from some trade that he hadn’t yet closed, and how in the end, he lost the profits he did have and then some. It reminds me a little of this quotation from Thomas Merton’s selected translations from the writings of Zhuang Zi, The Way of Chuang Tzu, which happens to be one of my favourite books:
The Need to Win
When an archer is shooting for nothing
He has all his skill.
If he shoots for a brass buckle
He is already nervous.
If he shoots for a prize of gold
He goes blind
Or sees two targets–
He is out of his mind!His skill has not changed. But the prize
Divides him. He cares.
He thinks more of winning
Than of shooting–
And the need to win
Drains him of power.[xix. 4]
I’ve been re-reading my older posts from 2007-2008 and came across this excerpt which bears repeating. (I could probably even re-use the entry title!) There really is nothing new under the sun.
In its infinite generosity, Washington came to the rescue. Of course it had no choice; no modern government would dare let a financial crisis turn into a general collapse. Yet the situation is rich with irony. In the early 1990s, Greenspan would craft the Federal Reserve’s bailout of the 1980s mania. And the braindead caretaker administration of George Bush crafted the greatest socialization of private loss in history, the S&L bailout. And, remarkably, almost nobody has suffered serious criminal penalties or political disgrace for this rampant abuse of trust. Huge quantities of public money — some $200 billion, though definitive accountings are hard to come by — were spent with little discussion or analysis, and the affair is now largely forgotten. The chance to use the industry’s partial liquidation as an opportunity to develop new public and cooperative financial institutions was blown. Within a couple of years of the crisis’ passing, no one paid it any mind any longer. It’s as if it never happened.
Interesting excerpt within a Bloomberg article on the real estate plunge in the US:
While prospects are grim in some areas, it wouldn’t be the first time prices made a comeback. The median U.S. home value tumbled 39 percent during the 1930s to $2,938 from $4,778 at the start of a decade dominated by the Great Depression, according to the Census Bureau.
Within 10 years the loss was erased, as servicemen back from World War II began buying houses financed with G.I. Bill benefits. The median home value increased to $7,354 by 1950, an average gain of 6.2 percent each year during the 1940s.
In the 1950s, home values surged an average of 15 percent a year, according to the Census. In the 1960s, the pace dropped to 4.3 percent before jumping to 18 percent a year in the 1970s, boosted by a U.S. inflation rate that reached 13 percent. In the 1980s, the average annual increase was 6.8 percent. The pace dropped to 5.1 percent during the 1990s.
Interesting to note how inconstant house price rises are, as well as the fact that home values just barely seem to outpace inflation. I’m reminded of a book I read — it might have been Robert Shiller’s Irrational Exuberance — where they pointed out that housing was rarely looked upon as an investment to be bought and sold like stocks until relatively recently, and it seems like it might be borne out by the fact that generally prices have tracked inflation, except relatively recently.
I don’t know enough about how housing was viewed during the Roaring Twenties, but given the 39% drop in value during the Depression, I’m wondering if housing had started to become looked upon as an investment back then, too?
After watching the quasi-illicit documentary Trader on Paul Tudor Jones (I feel like I’ve been talking about him non-stop lately on this blog), I did some more reading online and found a link to this interesting speech he gave to a high school class. An interesting follow-up is contained in the speech to something just hinted at in the documentary, where we see Tudor Jones at the beginning of his charitable work with inner-city students:
In 1986, I adopted a class of Bedford Stuyvesant 6th graders and promised them if they graduated from high school, I would pay for their college. For those of you who don’t know, Bed-Stuy is one of New York City’s toughest neighborhoods. Even the rats are scared to go there at night. Statistically about 8% of the class I adopted would graduate from high school, so my intervention was designed to get them all into college. For the next six years, I did everything I could for them. I spent about $5,000 annually per student taking them on ski trips, taking them to Africa, taking them to my home in Virginia on the weekends, having report card night, hiring a counselor to help coordinate afternoon activities and doing my heartfelt best to get them ready for college.
Six years later, a researcher from Harvard contacted me and asked if he could study my kids as part of an overall assessment of what then was called the “I Have a Dream” Program. I said sure. He came back to me a few months later and shared some really disturbing statistics. 86 kids that I had poured my heart and soul into for six years were statistically no different than kids from a nearby school that did not have the services our afterschool program provided. There was no difference in graduation rates, dropout rates, academic scores, teenage pregnancies, and the list went on. The only thing that we managed to do was get three times as many of our kids into college because we were offering scholarships whereas the other schools were not. But in terms of preparing these kids for college, we completely and totally failed. Boy, did this open my eyes. That was the first real-time example for me of how intellectual capital will always trump financial capital. In other words, I had the money to help these kids, but it was useless because I didn’t have the brains to help them. I had tried to succeed with sheer force of will and energy and financial resources. I learned that this was not enough. What I needed were better defined goals, better metrics, and most importantly, more efficient technologies that would enable me to achieve those goals.
What that whole experience taught me was that starting with kids at age 12 was 12 years too late. An afterschool program was actually putting a band-aid on a much deeper structural issue, and that was that our public education system was failing us. So in 2000, along with the greatest educator I knew, a young man named Norman Atkins, we started the Excellence Charter School in Bedford Stuyvesant for boys. We set the explicit goal of hiring the best teachers with the greatest set of skills to be the top performing school in the city. Now that was an ambitious goal but last year in 2008, Excellence ranked #1 out of 543 public schools in New York City for reading and math proficiency for any third and fourth grade cohort, and our school was 98% African American boys. We never would have done that had I not failed almost 15 years earlier.
The first part of Accrued Interest’s latest post strikes me as one of the few convincing statements about the use of technical indicators/charting that I’ve seen stated online. First and foremost, it’s a way to gauge the psychology of markets, which is something that can’t be done using fundamental factors. Whether it’s that effective is a good question, and whether the widespread use of charts and technical indicators is itself a cause of negative or positive feedback is another interesting line of inquiry. I agree with his view that it tends to get taken really far, often by people who put too much faith in these methods and metrics. It’s interesting to see how the more short-term a person tends to trade, the more that these technical factors seem to make sense; it’s clearly tied to the fact that psychology of market participants becomes more and more important in shorter time frames, and that in the long run, fundamental factors tend to win out after everyone’s calmed down and is seeing with clear vision. Warren Buffet never reads charts, Paul Tudor Jones claimed that he used technical factors in his decision-making about half the time, and the average daytrader probably doesn’t even place a trade without having MACD, RSI, Bollinger Bands, stochastic indicators, Fibonacci whatsits and reverse multiplier Kruchinski-Myer alpha-theta wave regressions overlayed on their chart.
